AFP thanks RBS and RBS Citizens for underwriting the 2012 AFP Liquidity Survey. The Research Department of the Association for Financial Professionals, which designed the survey questionnaire, analyzed the survey results and produced the report, is solely responsible for the content of the report.

Key Findings

Among the key findings of the 2012 AFP Liquidity Survey:
- 41 percent of organizations held greater cash balances during the first quarter of 2012 than in the same quarter of 2011
- 27 percent reduced their cash and short-term investment balances
- 77 percent indicate that safety is the most important short-term investment objective
- 51 percent of short-term investment balances are maintained in bank deposits, an increase of 9 percent from 2011 and the highest level reported in seven years of the AFP Liquidity Survey
- 74 percent of all cash balances are maintained in banks, money-market mutual funds (MMFs) and Treasury securities
- In terms of possible SEC rule changes involving MMFs:
. Up to 77 percent of organizations would be less willing to invest in MMFs and/or would reduce or eliminate their holdings in response to allowing the NAV to float
. 80 percent would be less willing to invest in MMFs and/or would reduce or eliminate their holdings if they were unable to fully liquidate MMF holdings immediately due to holdback provisions
. 66 percent would be less willing to invest in MMFs and/or would reduce or eliminate their holdings should fund companies be required to raise sufficient capital through fees.

Corporates spending?

Among organizations with smaller cash holdings versus a year ago, key reasons for the reduced holdings include increased capital expenditures (30 percent), acquiring a company or launching new operations (25 percent), paying back/retired debt (25 percent), and increased stock repurchases and paying dividends (22 percent). “Even in today’s environment of uncertainty, a number of companies are spending their cash holdings with an eye toward the future,” said Kevin Roth, Ph.D., AFP’s Managing Director, Research.

Nearly one-third of organizations anticipate growing their cash balances over the next 12 months, while 22 percent expect cash balances to contract. About half anticipate no change to the size of their cash and short-term investment holdings over the next year.

Forty-six percent of respondents from organizations that expect to decrease their cash holdings in the next 12 months believe their organization will do so primarily because of a decision to increase capital expenditures. In addition, more than a quarter of those anticipating a decline in cash cite “acquisition of a new company” or “launch of new operations” as a main reason for the action. Twenty-eight percent of respondents expect their organizations will have smaller cash levels from a decrease in operating cash flows.

Money Market Funds

Only 13 percent of respondents indicate the potential reform would have no bearing on their willingness to invest in MMFs.

Scanning the spectrum of policy changes an organization may make in the wake of a move to a floating NAV:
- 14 percent would not alter their investment strategy with MMFs until the NAV falls below $1.
- 7 percent would maintain current holdings but would not make additional investments in MMFs.
- 23 percent would stop making investments and would reduce current holdings.
- 33 percent would stop investing in MMFs as they eliminate all current holdings.

If enacted, the holdback provision would mean fund companies would subject redemptions by investors to a 10 percent holdback that would be paid about 30 days later.
- 43 percent of financial professionals indicate their organization would go as far as eliminating money-market funds from the short-term investment holdings altogether.
- Most would either reduce them (30 percent) or liquidate them entirely (43 percent).

Perhaps the more esoteric of the three proposals is the reserve capital rule proposal to provide a liquidity backstop. Most likely, a backstop will take the form of a cash reserve, securities pledge, letter of credit or some other means of funding.

- 34 percent of financial professionals indicate that fund companies having to raise sufficient reserve capital would not affect their organization’s willingness to invest in money-market funds.
- 30 percent say such actions would lead their organization to eliminate all MMF holdings.

By AFP Research Department
Published: 2012-07-10

Results of the 2012 AFP Liquidity Survey can be found here:
www.afponline.org/liquidity/

Laurent Leloup